The primary purpose of this thesis is to test the Fisher Hypothesis, identifying the relationship between stock returns and inflation, in Korean Stock Market. In addition to this analysis and as a secondary purpose, this study discusses the economic explanation about the relation, especially the anomalous negative relation between stock returns and various rates of inflation.
To clarify the relationship between stock returns and inflation in Korean Stock Market, various models were empirically tested for two periods, 1976.1 - 1980.12 and 1981.1 - 1984.12, differencing the level of rates of inflation. According to the results, the anomalous negative relation was indentified in the hyper-inflation period, 1976.1 - 1980.12. On the contrary, the Fisher Hypothesis was not rejected in the period of low level of inflation rates, 1981.1 - 1984.12.
About these empirical findings and according to the additional tests, this study reveals that the negative relation between stock returns and inflation in the hyper-inflation period can be explained by economic uncertainty model and reverse causality model, not proxy effect hypothesis. That is, the market risk premium for common stocks, which is increased as a response to increased economic uncertainty with increased inflation uncertainty, reduces the market value of common stocks and investors prefer other nonmonetary assets, like real estate, government bonds, corporate bonds.
